Small businesses, seemingly most hurt by GST, may end up as big gainers: Morgan Stanley

Small businesses, seemingly most hurt by GST, may end up as big gainers: Morgan Stanley

Amid the clamour about GST hurting the prospects of small businesses and traders, a Morgan Stanley research report says that the tax reform may actually help them in three key areas. It further says that the MSMEs are quite optimistic on the big benefits that lay ahead for them.

A Morgan Stanley AlphaWise survey of more than 1,500 businesses in India says that GST will lead to MSMEs get access to formal credit, thereby bringing down their working capital costs. (Image: IE)

Amid the clamour about GST hurting the prospects of small businesses and traders, a Morgan Stanley research report says that GST will actually help the MSMEs (Micro, Small and Medium Enterprises) to get access to formal credit, thereby bringing down their working capital costs. Prime Minister Narendra Modi has often termed GST as ‘good and simple tax’, adding that it will put an end to harassment of honest traders and small businesses while integrating country into one market with one tax.

The Morgan Stanley report outlines that GST will help lenders get data, which will further boost MSME working capital finances. In its recent report titled ‘India’s Digital Leap – The Multi Trillion Dollar Opportunity’ Morgan Stanley says, “Lenders will get access to cash flow data of MSMEs through multiple sources — for instance, digital payment platforms but more importantly GSTN (the Goods and Services Tax Network). This will likely help them get access to high-quality, high-frequency data that will allow them to lend to this sector.”

The report says that lending to this sector has so far been collateral-based, often as loans against property. But improved data could help the transition to cash flow-based lending. It also expects lending rates to decline by 300-400 basis points over the next five years as real-time data flow reduces loan risk.

The Morgan Stanley AlphaWise survey, which covered more than 1,500 businesses in India, says that the surveyed merchants are quite optimistic about GST and improving access to formal credit. The research emphasised that cost, convenience and collateral are the three bottlenecks for access to formal credit, and GST looks to address these three key factors directly. The research report also observed that GST will help India to move towards a digital economy. “India is moving from an archaic and complicated tax system to a unified and completely digital system,” says the report. “GST completely alters the way government finances are managed in India. It will significantly expand India’s tax net, a shift that, in our view, will provide a major boost to Indian government finances,” Derrick Kam, India Economist, told Morgan Stanley.